Does the cash flow support the deal? (DSCR and stress-testing)
The debt service coverage math lenders run, and how to stress-test it yourself before you make an offer.
What DSCR is, and how to calculate it yourself before you're under LOI
Debt service coverage ratio is cash flow available for debt service divided by the loan's total annual payment (principal plus interest). A DSCR of 1.25x means the business generates 25% more cash than it needs to cover the loan payment — the cushion between "technically covers the note" and "actually has room to breathe" if a slow month happens.
SBA lenders typically require DSCR above roughly 1.15 to 1.25x before approving a loan, and many hold acquisitions of an existing business to the higher end of that range specifically, since there's less operating history under the new owner to fall back on.
You can estimate it yourself before making an offer: cash flow available is your adjusted SDE (see the seller financials guide) minus your own reasonable owner compensation — what you'd actually need to live on, not the seller's number. Annual debt service is an estimated loan payment given the deal's likely price, your expected equity injection, an assumed rate (roughly Prime plus the spread covered in the SBA 7(a) basics guide), and the standard 10-year term. Divide the first by the second, and you have a rough DSCR before a lender ever runs the real numbers.
Stress-testing: what happens if revenue drops, or a customer walks
A DSCR that clears the floor using the seller's headline numbers isn't the same as a DSCR that survives a bad year. Stress-test your own estimate before you offer: what does DSCR look like if revenue drops 10 to 20%? What does it look like if it drops by exactly the share of revenue your largest customer represents, if that customer walked (see the diligence guide on customer concentration for how to check that number)?
Fixed costs don't shrink proportionally with revenue, so a revenue decline typically hits cash flow harder than a straight pass-through. A reasonable rule of thumb is to assume something like 1.5x operating leverage — a 10% revenue decline costing roughly 15% of cash flow — rather than assuming a 10% revenue drop only costs 10% of cash flow.
Stress the rate assumption too, not just cash flow: what does DSCR look like if the rate you actually qualify for lands a couple of points above what you assumed? Rate risk is real on a variable-rate SBA loan, and a deal that only works at today's best-case rate is a fragile one to buy into.
How this connects to numanknows' own buy-signal scorecard
The scorecard on every listing page runs exactly this kind of stress-testing automatically, against a fixed SBA DSCR floor of 1.25x: a baseline case at your resolved equity percentage (from your stated available capital, or a 10% default) with a standard rate and term assumption, then three stress cases — a 2-point rate increase, a 20% haircut to disclosed SDE, and a revenue-decline case that assumes fixed costs make a 10% revenue drop cost roughly 15% of cash flow, the same operating-leverage logic covered above.
A listing grades Strong only if the baseline DSCR clears the floor and every stress case that could be computed also clears it. Caution means the baseline holds but at least one stress case doesn't. A baseline that fails outright grades as a Pass on the deal. Any criterion missing the disclosed numbers it needs shows as insufficient data rather than silently passing — the scorecard doesn't guess when a listing hasn't disclosed enough to know.
The scorecard's exact inputs and criteria are visible on the listing page itself — it's worth reading the actual numbers behind the grade, not just the headline verdict, since the assumptions it uses (your equity percentage, the assumed rate) are estimates until a real lender confirms them (see the lender pre-qualification guide).
This guide is for informational and educational purposes only. It does not constitute legal, tax, financial, investment, or lending advice, and is not a substitute for advice from a qualified attorney, accountant, lender, or other licensed professional.